Osborne Hoping He Can Count on Carney

21/03/2013 14:27 GMT
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Updated
21/05/2013 10:12 BST

This year's budget is now in the books with the overall reaction in the press, at least, being one of general political, if not economic, positivity. That's the great thing about the expectations game, coming into this budget most people would have been indifferent even if a plague of locusts had been forecast, public sentiment is that downcast at the moment. In this sense, Osborne simply had to get out of the chamber without setting the dispatch box on fire and he would have been viewed as having done an OK job.

I will leave the intricate takedowns of the coalition's housing, corporation tax and fuel duty escalator plans for the broadsheet newspapers - they do it better than most everyone else. I wish to focus on the macro side of things and, in particular, the role of the Bank of England in this year's and further budgets.

Much like the UK has long since shown a preference for outsourcing certain operations to far-flung climes, the overall feeling from this Budget was that the Chancellor is looking to outsource the government's efforts at economic recovery to the incoming governor of the Bank of England, Canadian Mark Carney.

This speech was never going to see a big shift away from the fiscal conservatism which is Osborne's calling card, and therefore the appeals for growth have been met by a nod of the head in the direction of Threadneedle Street.

Osborne spoke of the need for "monetary activism" on Wednesday - something that you could argue that has already been in place here in the UK given the £375bn of asset purchases (QE) the Bank of England has already undertaken, and comments from Committee members around negative interest rates. Newer elements such as forward guidance should help smooth and configure rate expectations further out, but without a change in the Bank's inflation target the MPC will not be let off the leash to employ too many unconventional measures.

It seems more than likely that the first forward guidance projection will show that the Bank of England is unlikely to raise rates here in the UK until 2015.

On a month by month basis the Bank will now be allowed more latitude to consider unemployment and growth when looking to control inflation. However, the fact that the inflation target has not been changed from 2% means that the "monetary activism" which Osborne has promised cannot get too far out of control. It does mean that inflation is only likely to run higher under Carney, maybe that's why he asked for such a large salary in the first place.

How this impacts on growth is obviously the key and given the lack of success we've had in this area, from recent QE and the much-maligned Funding for Lending Scheme, some may see all of this as 'pushing on a string'. The OBR's growth expectation for this year (0.6% down from 1.2%) now match ours, moving forward, although we are prepared to lower that number even further, depending on Q1 data.

The shift in debt dynamics also means that the main indicator that ratings agencies look at for deciding whether a country should be downgraded is looking increasingly perilous. Yesterday's debt/GDP predictions saw the ratio rise to 85.6% through 2015/16 - that is not in keeping with a AAA rating. Moody's have already downgraded us and with Fitch and S&P already having the UK on negative watch I would suspect that we may lose another AAA notch within the next few weeks.

Put all this together and it is clear that the most important member of the UK economy through the coming years will be Mr Carney and not Mr Osborne and it seems that Westminster is more than happy for this to be the case.